After Budget Battle, Negotiations Look Grim

I have many topics in the column queue, but given the drama surrounding the spending deal, it is tough to write about anything else.

The first point is that any observer of Congress and of negotiation strategy has to give a serious nod and kudos to Speaker John Boehner for escaping from a very tight corner. As I noted last week, the Ohio Republican could have opted for a deal that would have attracted a bare majority–or less–of his own party and a sizable slice of Democrats, but at serious peril to his own standing. Or he could have held firm as a captive to his noisy right and ended up with a shutdown and turmoil that might have hurt President Barack Obama and the Democrats, but certainly would have damaged Republicans in the eyes of independent voters and more. (Interestingly, the first poll after the agreement shows that Obama and the Democrats get far more credit than Boehner and his Republicans, but that has little to do with the point above.)

We will see if Boehner loses votes from his own ranks as the details of the deal become clear–after all, half of the nearly $40 billion in cutbacks comes from mandatory spending, so the cuts in discretionary may not end up passing muster with some of his freshmen and Republican Study Committee troops. But the odds are very strong that he will get very solid backing from his caucus, based on a deal that, objectively, is a big plus for Republicans, given where they started. The credibility he gets for negotiating the deal, and holding out until almost the 59th second of the 59th minute of the eleventh hour, will strengthen his hand internally.

But the future negotiations are infinitely more difficult than these last ones. Boehner now has to deal with two distinct groups in his caucus. First are those who think he got the better of Obama, getting the number from $33 billion to nearly $40 billion, far closer to what Boehner had demanded than what Democrats had ever been willing to concede. This group will now insist that Boehner double down on his demands and firmness because they believe the president will fold like a cheap suitcase. If a group of kidnappers took hostages, demanded ransom and got just what they wanted, wouldn’t they be encouraged to do it all again?

The second group includes those who think the deal amounts to capitulation–they had pledged to get $61 billion from the discretionary budget and not a penny less. They got a third of that. Their motto will be borrowed from the movie Galaxy Quest, “Never give up, never surrender.”

Both groups think they have much more leverage going forward. A government shutdown brings inconvenience and dislocation for a finite period. A breach of the debt limit is much more profound and much more long-lasting. The more outside “opinion leaders” warn of dire consequences, the more some of the populist tea partyers and the ideologically driven Republican Study Committee leaders will scoff at the Washington insiders and establishment nabobs preaching doom and gloom. Some of the hardliners may accept the warning but will basically believe that if you are going to achieve the revolution that is at hand, as represented in the Paul Ryan budget, you have to break some crockery and spill some blood.

This time, they are not demanding another $61 billion or $100 billion in the next year’s budget (although brace yourself for a series of guerrilla battles ahead on the next wave of appropriations bills, with more threats of shutdowns this fall), but are aiming much higher. We have Sen. Marco Rubio (R-Fla.) on record in the Wall Street Journal setting a very high bar–passage of the constitutional amendment to balance the budget, deep spending cuts, and more–before agreeing to raise the debt ceiling. Presidential candidates like Tim Pawlenty have basically reacted to the idea of breaching the debt limit by saying, “Bring it on.” Now that we have the Ryan budget, many of Boehner’s rank-and-filers will be demanding adoption of some combination of the Medicare and Medicaid changes and the remarkably deep cuts in discretionary spending.

America has never in its history defaulted on its debt. Even if, as Pawlenty has said, revenue will keep coming in and creditors in China and elsewhere will be paid (it is just government that will stop), the external reaction is likely to be severe and swift. Creditors will have immediate doubts about America’s credibility and future, and at minimum demand a new and hefty risk premium to buy and hold American dollars and T-bills. Higher interest rates will threaten economic prosperity and add substantially to government borrowing costs, meaning even more of a deficit/debt problem! At the same time, markets lulled into a false sense of security by the eleventh hour deal on the CR will expect the same on the debt ceiling. If it doesn’t happen, the reaction in the markets will be dramatic.

Boehner knows this, which is why right after the elections he warned his Members about the need to avoid confrontation on the debt limit. But this time, he might find the only available alternative to breaching the debt ceiling is to accept a formula that attracts less than half his caucus. Is he strong enough to pull this one off?

Obama knows this, but also knows that he would be gravely damaged if he caved and embraced the Ryan plan or anything remotely close to it, much less a catastrophic balanced budget amendment. The easy part is over.